GBP/USD Surges as Softening Fed Expectations and UK Growth Boost Sterling

The GBP/USD has recovered from its early decline and is now trading near 1.3495 during Thursday's European session, influenced by reduced expectations for near-term Federal Reserve rate hikes and stronger-than-expected UK economic activity.

Investors are placing greater emphasis on the moderating inflation pressures and increasing concerns about the labor market, which has weakened demand for the US Dollar. The US Consumer Price Index (CPI) data for July reinforced this cautious Fed outlook, with headline inflation rising 3.4% year-on-year and core CPI growing 2.5%. Monthly headline and core inflation increased 0.1% and 0.2%, respectively.

The CME FedWatch Tool indicates that the probability of the Federal Reserve keeping interest rates unchanged at its September meeting has risen to nearly 60%, from just 30.4% a month earlier. This shift is also reflected in the US Dollar Index (DXY), which measures the Greenback against six major currencies and is trading around 99.90, down approximately 0.1%. The recent UK economic developments have provided some support for Sterling, with June GDP increasing 0.3% month-on-month, exceeding expectations.

The stronger growth figures are unlikely to significantly alter expectations for Bank of England policy, making the GBP/USD sensitive to upcoming US inflation data and broader interest-rate expectations. A softer reading in Thursday's US Producer Price Index (PPI) could further reduce expectations for additional Fed tightening and weigh on the Dollar.